Commercial property returns improving

The index, produced by the Property Council of New Zealand and real estate research firm IPD, said the combined result of 9.2% was stronger than the return seen in the previous quarter but lower than the long-term average total return of 10%.

The level of return generated by commercial property has been steadily climbing since a low of almost -0.5% was recorded in September 2009.

The retail sector has led the industrial and office sectors through the recovery phase, with each sector of the market reporting total returns of 13.3%, 9.6% and 7.1% respectively.

The IPD report said that reflected strength in retail spending.

The performance in the industrial sector has been stable, while the office sector experienced weakness in capital values, corresponding with soft employment and business conditions.

“The pace of recovery in all sectors remains slow and reflects weak space market fundamentals and macro-economic activity.”

The report said the New Zealand property market had experienced a mild downturn, compared to its British, US and Irish counterparts.

Over the short term, the New Zealand market is expected to perform favourably against competing property markets globally.

Dr Anthony De Francesco, managing director of IPD in Australia and New Zealand, said: “The latest results suggest that the broader commercial property market is slowly showing signs of improvement with capital values increasing over the year. However, market conditions vary markedly across property sectors.”

He said office property was likely to remain subdued because of a soft labour market.

“The retail property sector will continue to experience a stronger investment return than the office sector, but is expected to be weaker going forward.”

The report found that capitalisation rates – the difference between the net operating income and the property’s capital cost – stood at an average 8.2% for the year to September 2012.

The retail sector experienced mild cap rate compression, which is consistent with positive capital growth. Conversely, the office sector experienced cap rate decompression corresponding with capital growth declines.

De Francesco said: “Cap rates, while likely to remain generally steady, will vary across property sectors: retail and industrial sectors are expected to experience mild firming in cap rates while the office sector is set to experience a stabilisation in cap rates for prime stock.”

Property Council New Zealand’s chief executive Connal Townsend said: “The latest results we have seen today are heartening, proving that the commercial property market has officially turned a corner. I expect the increases we are seeing in property returns steadily rising as the market continues to pick up.”
He said the steady and strong performance of industrial returns has been consistent over a sustained period of time. “This segment is a high performer in the commercial property market in New Zealand.”

Retail returns had been good, he said, and office returns had improved.

“All sectors combined now show a marked increase, and the returns are now quite close to the long-time run of 10% we have had since 2007 which predates the Lehman Brothers crash. It is positive to see the index so strong, with nearly 600 property assets considered which represent more than $11 billion in value.”